Your Money | MONEY TALK

When It Comes to Making Investment Choices, Hindsight is Not 20/20 Vision

Q At one time last year I had $100,000 in a 401(k) with a former employer. By the end of the fourth quarter, it was down to $84,000. Then it went up to $88,000, and two days ago it dropped to $82,000. I am so worried that it's going to drop even lower. I understand the three funds I've chosen are on the risky side. Should I move my money into the less risky choices, like the government bond fund?

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A Did you perhaps pick your 401(k) funds, as many people do, by simply grabbing the investment choices that had reported the highest returns in prior years?

If so, that was a mistake, fueled by greed. Don't compound your error by letting fear take over and shoveling all your money into a low-returning but "safe" bond fund.

Investors have to learn to live with some risk. Most of us, unfortunately, don't have the luxury of staying out of stocks altogether if we want to retire someday. That means you'll need to figure out a way to weather the inevitable drops in the market.

One way is to make sure your retirement funds are properly allocated for your age and situation. Online services such as Quicken's 401(k) Advisor at http://www .quicken.com or Financial Engines at http://www.financialengines .com can help with that task and recommend specific funds for your 401(k) investments.

Chances are you'll need to allocate at least some of your 401(k) to lower-risk investments such as a bond fund or money market account. But the bulk of your retirement account should stay in higher-risk stocks.

Also, try reading one of the many excellent primers about investing--Eric Tyson's "Investing for Dummies" (IDG Books Worldwide, 1999) and my colleague Kathy M. Kristof's "Investing 101" (Bloomberg Press, 2000) are good choices. You'll get a clearer idea of how markets work and what you can realistically expect from your retirement funds.

Next, put volatile markets to work for you. Continue to invest regularly, preferably by putting part of each paycheck into a retirement fund. Consider that you're buying stocks "on sale" and that these investments probably will rise in price over time if you continue to have a well-diversified and properly allocated portfolio.

There are no guarantees in investing, but you're much more likely to reach your goals using this approach than by constantly switching your investments based on fear--or greed.

Credit Card Debt

Q You recently suggested that a reader use savings (actually, a mutual fund investment) to pay off credit card debt, advising that the person would feel better if debt-free. As a financial advisor, I've found that most of my clients simply can't learn to live without debt. If they sell an investment to pay off a credit card, they will simply run up more charges. Better to stay invested for the long run. I think you should reconsider your advice.

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A Your approach is somewhat akin to a doctor giving a chain smoker vitamins and a pat on the back.

Yes, some people are addicted to debt. But as their advisor, it's your job to try to help them see how destructive credit card debt is to their financial well-being.

The typical American family with credit card debt now carries about $8,000 on their cards at an average annual rate of 17%. They're paying almost $1,500 a year in interest--money that, if invested at 10% instead, could grow to about $250,000 over 30 years.

It makes little sense for people to have money in savings or non-retirement investment accounts when credit card debt is eroding their finances at that rate.

There are other reasons you, as an advisor, should be a tad cautious about promoting a stay-in-debt approach. Suspicious clients might note that you don't get paid if investors' disposable income goes to the credit card company instead of a load fund or a managed account.

Not that you would ever be so crass as to put your interests ahead of your clients', but sometimes the appearance of a conflict of interest is all it takes to plant the seed of doubt.

Roth IRA Versus 401(k)

Q I read your columns religiously and I love your no-nonsense replies, especially to stupid questions (and yes, there is such a thing as a stupid question). I hope mine is not one: My contributions to a 401(k) plan are not matched by my company. I have paid all my credit card debts and I plan to set aside more money for my retirement. Is there any benefit in making contributions to my Roth IRA instead of increasing my 401(k) contributions?

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A A wise (but cranky) person once said there may be no stupid questions, but there certainly are stupid people. You, dear heart, are not one of them. Your wisdom in paying off your credit cards and wanting to save more for retirement shows that.

When it comes to Roth IRAs versus 401(k)s, you're balancing an immediate tax break against a future tax break. If you expect to be in the same or higher tax bracket in retirement, contributing to a Roth IRA instead of making more contributions to your 401(k) can make sense. You'll find plenty of information about Roth IRAs at http://www.latimes.com/ taxes and http://www.rothira.com.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times' Web site at http://www.latimes.com/moneytalk.